Sunday, March 19, 2006

For the trouble of having to wade through all of the details of the pension reform bill now being gutted in House-Senate conference, Mary Williams Walsh gets a Voxy. I remember working on the early stages of this reform effort while at CEA. It started out simply enough:

With a strong directive from the Bush administration, Congress set out more than a year ago to fashion legislation that would protect America's private pension system, tightening the rules to make sure companies set aside enough money to make good on their promises to employees.

Enter the Congressional porkfest, and what do we now have?

Then the political horse-trading began, with lawmakers, companies and lobbyists, representing everything from big Wall Street firms to tiny rural electric cooperatives, weighing in on the particulars of the Bush administration's blueprint.

In the end, lawmakers modified many of the proposed rules, allowing companies more time to cover pension shortfalls, to make more forgiving estimates about how much they will owe workers in the future, and even sometimes to assume that their workers will die younger than the rest of the population.

On top of those changes, companies also persuaded lawmakers to add dozens of specific measures, including a multibillion-dollar escape clause for the nation's airlines and a special exemption for the makers of Smithfield Farms hams.

As a result, the bill now being completed in a House-Senate conference committee, rather than strengthening the pension system, would actually weaken it, according to a little-noticed analysis by the government's pension agency. The agency's report projects that the House and Senate bills would lower corporate contributions to the already underfinanced pension system by $140 billion to $160 billion in the next three years.

Two excerpts from the article say it best:

"It takes a better economist than me to understand how reducing contributions by that much is going to protect benefits and put the system on a sounder footing," said Jeremy I. Bulow, an economist at Stanford University.

That's actually funny, since there are no demonstrably better economists than Jeremy Bulow. And then we have the author's own attempt to make sense of this:

Someone must pay for this. Currently, the pension agency finances itself in part through the insurance premiums that companies are required to pay into the system. Raising the premiums to support pilots or help other victims of corporate bankruptcies, some companies in other industries are starting to say, would be unfair.

This is the contemptible legislative impulse to favor the special interest over the general interest. Read the whole thing and be amazed at how unprincipled the House and Senate are being.

The President has been losing credibility on several issues related to finances as of late. He could get some of it back if he would simply VETO this monster and send it back to the sty. If for no other reason, he should do it to show respect for the many people in his administration who worked diligently on a much better blueprint for reform.

For my own views on how to reform the defined benefit pension system, see these earlierposts.

The defined benefit pension plan is a dead duck. It is joining history along with men's hats, cigarette vending machines and typewriters. Next to go are the auto companies.

The only question is when. The PBGC was a bad idea from the get go. Trying to protect it not going to help. If they put a sufficent premium on plans to bail out the PBGC and required corporate funding on the assumption of 4.5% interst rates, db plans will disapear sooner. If Congress does nothing, it will be not quite as soon.

I agree with Robert. Defined benefit plans are dinosaurs. Congress will not act because K Street is running the show. The strategy is to improve the corporate bottom line by siphoning off as much pension money as possible. That is what Mitch Daniels and his "greed is good" buddies successfully did for IPALCO at the expense of the workers.

Detroit is in far worse shape than many recognize. GM and Ford are cutting production to try to match market demand. Meanwhile Toyota is opening a new line in Indiana to produce 100,000 more vehicles. This means future cuts by GM and Ford to match diminishing demand. It is a downward spiral. The shift in marketshare from Union to Non-union producers will severely impact pensions. The profitable GMAC could split off GM to protect shareholder equity and leave pensioners out in the cold. The collapse and consolidation of Big Steel has already left many pensioners far poorer than they anticipated.

If Congress does not act, the Unions will. It will not be pretty. At this point there needs to be a plan to roll the investment in defined benefits plans into defined savings. Corporate credibility for managing pensions is lower than the Bush approval ratings.

I believe that you should contact Alpha and try to get a copy of NWA MEC R&I Committee Update #03, Pension Legislation, dated May 13, 2005.

You might start with Alpha Membership Services at 888-FLY-ALPA or call direct to the pilots union officials if you know the numbers. Otherwise, you can ask for a copy via the Congressional sponsors of the Senate and House bills.

This document will set you straight on what is really at stake for NWA and its pilots with regard to the existing DRC rules. I'm not convinced that you understand fully all the ramifications on this aspect of the Congressional legislation.

Lost in the forest of Airline pension reform arguments is the unimportant (except to airline pilots) tidbit that did NOT pass Congress. My question: How is it 'right' to require/mandate a pilot to retire at age 60 (note they have been fighting for years to have this mandatory retirement age raised) and then penalize him/her for retiring 5 years early? (PBGC payments reduced over 30% for those pilots unfortunate enough to work for airlines that have or are going to take advantage of bankruptcy laws).

About Me

I am a Professor of Economics and the Director of the Nelson A. Rockefeller Center at Dartmouth College. I am on the boards of Ledyard Financial Group (LFGP) and the Montshire Museum of Science. I blog about economics, politics, and current events at http://samwick.blogspot.com. The opinions expressed here, there, and everywhere do not necessarily reflect the views of Dartmouth College or any other institution with which I am affiliated.

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